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To adapt the old chestnut, there are three great lies in life: the cheque is in the post; Iím
from the government and Iím here to help you; and past performance is no guide to the
future. A momentís thought shows you how silly the last statement is. Were it true, we
could abolish examinations, references and almost every other means of distinguishing
between the options open to us.

Past performance is not a perfect guide to the future, but itís the only one weíve got and it
can give us useful information. Do we want to invest in small companies? Then we go for
proven small company managers. Do we want yield? Then we go for income managers
with good track records. And so on.

Agreed. I picked most of my current funds by looking into the history of the funds and their managers before looking into the type of companies they invested in and if I would invest in those companies myself. The past performance definitely guided me to these funds and I have done well from them.

I do understand why this statement has to be simple though whereas the reality is a little more complex

I take that statement to warn people you can't literally expect the same. IE if one fund went up 80% in 3 years, it cannot be expected to do the same over the next 3 years.

As already stated the reality is that it is complex and long term trends can be seen from past performance. Stuff like smaller companies doing better over the long haul, emerging markets doing better over the long haul, certain active fund managers adding performance and so on.

To adapt the old chestnut, there are three great lies in life: the cheque is in the post; Iím
from the government and Iím here to help you; and past performance is no guide to the
future. A momentís thought shows you how silly the last statement is. Were it true, we
could abolish examinations, references and almost every other means of distinguishing
between the options open to us.

Past performance is not a perfect guide to the future, but itís the only one weíve got and it
can give us useful information. Do we want to invest in small companies? Then we go for
proven small company managers. Do we want yield? Then we go for income managers
with good track records. And so on.

ďPast performance.....Ē is a get out of jail free card that translates as, Ďwell...I did warn you, now sod offí

The claims that investing in equities long term is safe and solid, and all the downs will eventually become ups, is a trick and a half. This trick is accomplished by use of the historic tables of bourses.....which always go up over time .........of course.

As the devil is in the detail, and that detail is so visible, it has to be pointed out how the trick is done. All the losers and underperformers are weeded out, leading to an ever inflating valuation of those markets.

The adage about past performance being no guide to future performance is most commonly applied to funds within a given sector. A 1st quartile fund 1 year can often be a 4th quartile fund the next. Look at the results from a certain well known income fund manager.

It is less applicable to individual sectors and shares which can be more affected by long term trends.

Sometimes a fund manager with a focussed style can latch onto a long term trend with spectacular results (eg Andrew Bolton with Fidelity Special Situations in the 1990s and also possibly Terry Smith with Fundsmith more recently) but this is rare.

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